‘Lack of clarity’ is at the heart of ESMA’s letter on AIFMD recommendations
20 August 2020 London
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A “lack of clarity” has been said to be at the heart of the European Securities and Markets Authority’s (ESMA) letter to the European Commission setting out areas to consider on the upcoming Alternative Investment Fund Managers Directive (AIFMD) review.
Commenting on the letter, consultant Tony Freeman explained that the ESMA letter covers a lot of issues but one of the highest-profile is the issue of delegation and substantive-presence.
Freeman noted that while the letter states that delegation can lead to "operational and supervisory risks" it doesn’t define what the risks are or provide any evidence to support this view.
He commented: “It equates legislative differences between EU and non-EU rules with ‘regulatory arbitrage’ and ‘circumvention’. These are strong words and quite contentious. And again, no evidence is given. Is it a politicised viewpoint?”
According to Freeman, resolution of what functions are to be defined as being ‘collective portfolio management’ versus ‘supporting tasks’ will be a very high-profile issue.
He highlighted that if the outcome is that core portfolio management functions must be performed within the EU, which appears to be the political ambition, substantial organisational change is inevitable.
“The issues are complex, and they are definitely not confined to the future EU-UK relationship. The delegation model has a global impact because whatever new rules are defined surely have to apply equally to all non-EU countries,” Freeman added.
ESMA’s letter also focused on how the review is a chance to consider “greater harmonisation” of the UCITS and AIFMD regimes.
It explained in some cases, the newer AIFMD provisions are “more granular or specific compared to the UCITS requirements, although there might not be any objective justification for such differences”.
ESMA used the example of different levels of granularity with respect to risk management and liquidity management requirements.
The letter stated: “The European Commission should consider aligning the frameworks where appropriate, in particular as applying different requirements to management companies which manage both UCITS and AIFs creates additional burdens for the firms concerned and divergences in supervisory/regulatory outcomes.”
ESMA said the AIFMD review provides the EU with “an opportunity to apply lessons learned”.
It also encouraged the commission to support the areas identified in the letter “in order to improve the effectiveness and soundness of the AIFMD”.
Read more of Tony Freeman’s comments on ESMA’s letter of considerations for the AIFMD review.
Commenting on the letter, consultant Tony Freeman explained that the ESMA letter covers a lot of issues but one of the highest-profile is the issue of delegation and substantive-presence.
Freeman noted that while the letter states that delegation can lead to "operational and supervisory risks" it doesn’t define what the risks are or provide any evidence to support this view.
He commented: “It equates legislative differences between EU and non-EU rules with ‘regulatory arbitrage’ and ‘circumvention’. These are strong words and quite contentious. And again, no evidence is given. Is it a politicised viewpoint?”
According to Freeman, resolution of what functions are to be defined as being ‘collective portfolio management’ versus ‘supporting tasks’ will be a very high-profile issue.
He highlighted that if the outcome is that core portfolio management functions must be performed within the EU, which appears to be the political ambition, substantial organisational change is inevitable.
“The issues are complex, and they are definitely not confined to the future EU-UK relationship. The delegation model has a global impact because whatever new rules are defined surely have to apply equally to all non-EU countries,” Freeman added.
ESMA’s letter also focused on how the review is a chance to consider “greater harmonisation” of the UCITS and AIFMD regimes.
It explained in some cases, the newer AIFMD provisions are “more granular or specific compared to the UCITS requirements, although there might not be any objective justification for such differences”.
ESMA used the example of different levels of granularity with respect to risk management and liquidity management requirements.
The letter stated: “The European Commission should consider aligning the frameworks where appropriate, in particular as applying different requirements to management companies which manage both UCITS and AIFs creates additional burdens for the firms concerned and divergences in supervisory/regulatory outcomes.”
ESMA said the AIFMD review provides the EU with “an opportunity to apply lessons learned”.
It also encouraged the commission to support the areas identified in the letter “in order to improve the effectiveness and soundness of the AIFMD”.
Read more of Tony Freeman’s comments on ESMA’s letter of considerations for the AIFMD review.
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